Re the severity of fluctuations in the 1800s, this is confirmed by a chart published in the Financial Times. Tom Hickey re-produced it on Mike’s blog a few months ago, can’t find it there. Anyway, it’s here on my blog:http://ralphanomics.blogspot.co.uk/2011/08/economic-fluctuations-since-1870_26.html

The problem now is that the government is forced to behave as if it is on the gold standard (fixed money supply), whilst banks are allowed, and encouraged, to expand the money supply as much as they want through credit.

This is all in the name of a free market quasi-monetarist ideology, which prefers to see banks at the top of the money pyramid, with government reduced to the level of a business or household and the central bank as just a servant of the banking sector.

The dominant ideology at present is that mythical ideas about the free market should be imposed on the real world to make the real world mimic these mythical ideas. Hence "natural rates of interest", "natural rates of unemployment" etc.

Things which are in fact total constructions (not natural) are imposed on reality and then the result is described as "natural". It's quite extraordinary.

Gold bug people often argue that with a gold standard we would have less wars, as they would be more difficult for governments to fund. But all they're really saying is that IF governments stick to the rules, then there will be less wars. So really all they're saying is that what we need to prevent wars is governments which stick to the rules. Well, duh. Wars of aggression by definition "break the rules" (they are illegal).

"The problem now is that the government is forced to behave as if it is on the gold standard "

This isn't entirely true of course. After all the Fed is currently controlling bond yields and the supply of base money never meets any limitations. What I meant is that at present, the hysteria about running out of money is forcing the govt to think about its options as if it were in a gold standard, fixed money supply system. Again, mythical ideas about 'natural budget constraints' and 'natural monetary systems' are being imposed on a very different reality, to make that reality conform to those myths. And of course There Is No Alternative - it's just "natural".

I just came across an article in IEEE Spectrum magazine (Electrical Engineers) that gets a lot of stuff right or pretty close. It quotes Graeber, talks about the neoclassical fascination with scarcity and notes that gold standard was such because it was declared to be, much like our current fiat paper. Wiki claims 380K readership for the magazine. The article is not perfect, but better then most. IT seems to me that Engineers (like me) catch on to MMT and closed systems more easily then many. Anyway, here is the link: